Budds & McGranahan. Debates on Water Security

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2003 15: 87Environment and UrbanizationJessica Budds and Gordon McGranahan

Asia and Latin Americare the debates on water privatization missing the point? Experiences from Africa,

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Environment&Urbanization Vol 15 No 2 October 2003 87

WATER PRIVATIZATION

Are the debates on water

privatization missing the point?

Experiences from Africa, Asia

and Latin America

Jessica Budds and Gordon McGranahan

SUMMARY: This paper has two principal aims: first, to unravel some of the

arguments mobilized in the controversial privatization debate, and second, to reviewthe scale and nature of private sector provision of water and sanitation in Africa,Asia and Latin America. Despite being vigorously promoted in the policy arenaand having been implemented in several countries in the South in the 1990s, priva-tization has achieved neither the scale nor benefits anticipated. In particular, thepaper is pessimistic about the role that privatization can play in achieving theMillennium Development Goals of halving the number of people without access towater and sanitation by 2015. This is not because of some inherent contradictionbetween private profits and the public good, but because neither publicly norprivately operated utilities are well suited to serving the majority of low-incomehouseholds with inadequate water and sanitation, and because many of the barri-

ers to service provision in poor settlements can persist whether water and sanita-tion utilities are publicly or privately operated. This is not to say that well-governedlocalities should not choose to involve private companies in water and sanitationprovision, but it does imply that there is no justification for international agenciesand agreements to actively promote greater private sector participation on thegrounds that it can significantly reduce deficiencies in water and sanitation serv-ices in the South.

I. INTRODUCTION

DURING THE 1990s, private sector participation was vigorously promotedon the water and sanitation policy agenda for the South as a means ofachieving greater efficiency and expansion in the water and sanitationsector. It can be broadly situated within the set of neoliberal reformswhich, in the water sector, have been driven by multilateral financial insti-tutions with the support of bilateral development agencies, even in the faceof considerable resistance.

There is general agreement that public utilities have been too slow inextending access to services and that they can be inefficient and corrupt.Increasing private sector involvement to address these problems remainsvery controversial, however. For many, the question of how water andsanitation should be provided goes to the heart of the appropriate role ofgovernment. Moreover, while the debate is ostensibly about matters ofhigh public interest, what makes the conflict between privatization andits alternatives so contentious are the conflicting vested interests of the

Jessica Budds is a doctoral

candidate in the School ofGeography and theEnvironment at theUniversity of Oxford,working on waterprivatization and watermarkets in Chile.

Address: School ofGeography and theEnvironment, MansfieldRoad, Oxford, OX1 3TB,United Kingdom; e-mail:[email protected]

Gordon McGranahan isdirector of the HumanSettlements Programme atIIED.

Address: InternationalInstitute for Environmentand Development, 3Endsleigh Street, London,WC1H 0DD, UnitedKingdom; e-mail:[email protected]

This paper is drawn from a

longer IIED Working Paperby Jessica Budds andGordon McGranahan,Privatization and theprovision of urban waterand sanitation in Africa,Asia and Latin America(July 2003). This paper is orshortly will be available athttp://www.iied.org/urban/index.html

The authors would like tothank David Johnstone(independent water and

sewerage consultant), whogenerously gave his time tobe interviewed for thispaper; David Hall (director,Public ServicesInternational Research

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key actors within the water sector, such as between private companiespursuing profits and public sector employees protecting their jobs. Unfor-tunately, the private versus public debate obscures the variety of rolesprivate enterprises can play in water and sanitation utilities, detractsattention from problems that have nothing to do with privatization and,moreover, makes it easy to lose sight of how the process of privatization

is actually unfolding.Under the right circumstances, it may well be possible for private sector

participation to improve efficiency and increase the financial resourcesavailable for improving water and sanitation services. However, it canalso direct finance to urban centres and neighbourhoods that are alreadycomparatively well served, further polarize the politics of water and sani-tation (especially when prices increase) and create new regulatory prob-lems. Much depends on the way privatization is developed and the localcontext.

Despite its prominence in the water sector, the scale and benefits ofprivate sector participation remain limited. Only around 5 per cent of the

worlds population is currently served by the formal private sector.During the 1990s, the level of private sector participation increased signif-icantly in Africa, Asia and Latin America, but was concentrated in coun-tries with larger economies and populations and higher levels ofurbanization. The level of foreign private finance and investment has alsobeen disappointing. Furthermore, problems and conflicts have arisen in anumber of cases.

It should be noted at the outset that few of the people identifiedthrough the water and sanitation targets are likely to be served in the fore-seeable future by the conventional water and sewerage networks oper-ated by either private water companies or most public utilities. The recent

Global Water Supply and Sanitation Assessment estimated that 1.1 billionpoor people still lack reasonable access to improved drinking watersupplies and 2.4 billion lack reasonable access to improved sanitation. (1)

More than 80 per cent of these unserved live in rural areas. As indicatedin a recent UNHabitat book (for which an earlier version of this paperwas submitted as a background paper), the number of urban dwellerswithout adequate water and sanitation services is probably far higherthan these figures imply.(2) But even the unserved urban dwellers tend tolive in the smaller, low-income towns and cities, or low-income neigh-bourhoods within large cities, which the large water companies haveshown little interest in serving.

Following a brief note on definitions, this article reviews the polemicdebate surrounding private sector participation in water and sanitationservices, critically examining the common arguments mobilized for andagainst its implementation in the South. It then reviews the trends andissues in the development of privatization in the water and sanitationsector in Africa, Asia and Latin America, with particular attention toprivate provision to low-income groups. The final section brings togetherthe key points by way of conclusion.

a. A note on definitions

The term private sector participation is used in the literature to cover awide range of arrangements between a government agency and a non-public institution, but usually refers to a contractual agreement involvinga public agency and a formal (often multinational) private company.

88 Environment&UrbanizationVol 15 No 2 October 2003

WATER PRIVATIZATION

1. WHO and UNICEF(2000), Global Water Supplyand Sanitation Assessment2000 Report, World HealthOrganization and UNICEF,Geneva.

2. UNHabitat (2003), Waterand Sanitation in the WorldsCities, Earthscan, London.

Unit, University ofGreenwich), who assistedwith data on the globalscale of privatization; andDiana Mitlin (IIED andUniversity of Manchester),who provided materialsand background notes.

Comments were gratefullyreceived from DavidJohnstone, David Hall andAndrei Jouravlev (UnitedNations EconomicCommission for LatinAmerica and theCaribbean). The authorswould also like to thankUNHabitat for theirsupport.



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However, small-scale and/or informal operators are increasingly beingrecognized and described as private enterprises, as are civil society organ-izations where they engage in the provision of water and sanitation serv-ices, often on a small scale and to low-income settlements.(3) These operatorsare very different types of organizations from large water companies and,typically, play very different roles and operate on very different principles

(e.g. on a not-for-profit basis).The term privatization is also widely used but can refer to two rather

different things. It is sometimes used as a generic term to refer to increas-ing private sector involvement, but also specifically to the model ofdivestiture (see below).

Publicprivate partnership is a common term but is rarely explicitlydefined. In the water and sanitation sector, it tends to be used to refer tocontractual arrangements in which private companies assume greaterresponsibility and/or risk, especially through concession contracts.(4) In suchcases, the use of the term partnership may be meant to imply that theparties involved have mutually shared objectives and working arrange-

ments that go beyond the fulfilment of any contractual agreement.(5)For the purposes of this paper, privatization refers to processes that

increase the participation of formal private enterprises in water and sani-tation provision but do not necessarily involve the transfer of assets to theprivate operator. References to private sector participation also refer toformal private enterprises operating for or with water utilities. The termpublicprivate partnership is not used, on the grounds that it can implyshared objectives that do not exist. The paper focuses on private provi-sion directly to users and less on private sector involvement in otherwater-related functions. Although important, small-scale and informaloperators and civil society organizations are not considered to be within

the private sector scope of this paper.There are several models of private sector involvement in water and

sanitation utilities, with numerous variations, depending on the legal andregulatory frameworks, the nature of the company and the type ofcontract. The typical forms of private sector are briefly described below,ordered in terms of the extent of private sector responsibility, as summa-rized in Table 1.


WATER PRIVATIZATION

3. Solo, Tova (1999), Small-scale entrepreneurs in theurban water and sanitationmarket, Environment andUrbanization Vol 11, No 1,pages 117131; also Bennett,Anthony (1998),Sustainable public/private

partnerships for publicservice delivery, NaturalResources Forum Vol 22, No3, pages 193199.

4. Crosslin, Robert, (1991),Decision-supportmethodology for planningand evaluating PPPs,

Journal of Urban Planningand Development Vol 117, No1, pages 1531.

5. See reference 3, Bennett(1998).

Table 1: Allocation of key responsibilities for private participation options

Assetownership

Capitalinvestment

Commercialrisk

Operations/maintenance

Contractduration

Service contract Management Lease / Concession BOT-type Divestiture

contract affermage

Public Public Public Public Private / Privatepublic

Public Public Public Private Private Private

Public Public Shared Private Private Private

Private / public Private Private Private Private Private

12 years 35 years 815 years 2530 years 2030 years Indefinite

SOURCE: Adapted from Stottman, Walter (2000), The role of the private sector in the provision of water and wastewater services inurban areas, in Uitto, Juha and Asit Biswas, Water for Urban Areas, United Nations University Press, Tokyo.



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Service contracts are usually short-term agreements whereby a privatecontractor takes responsibility for a specific task, such as installing meters,repairing pipes or collecting bills for a fixed or per unit fee.

Under a management contract, the government transfers certain oper-ation and maintenance responsibilities to a private company but retainsresponsibility for investment and expansion. Payment is either fixed or

performance related.Lease and affermage contracts are similar to management contracts,

but the private operator takes responsibility for all operation and main-tenance functions, including billing and revenue collection. In both cases,the operator collects the tariff revenue but, under an affermage, thecontractor is paid an agreed-upon affermage fee for each unit of waterproduced and distributed; whereas under a lease, the operator pays alease fee to the public sector and retains the remainder.

Under concession contracts, the private contractor manages the entireutility and is required to invest in the maintenance and expansion of thesystem at its own commercial risk. Concessions have longer terms, to

allow the operator to recoup its investment and, at the end of the contract,the assets either are transferred back to the state or a further concession isgranted. The role of the government is predominantly regulatory. BOT(BuildOwnTransfer) type contracts are similar to concession contracts,with the difference that the private contractor is responsible for construct-ing the infrastructure from scratch.(6) They are usually used for green-field projects, such as water purification and sewage treatment plants.The private partner then manages the infrastructure, with the governmentpurchasing the supply. At the end of the contract, the assets either remainindefinitely with the private company or are transferred back to thegovernment.

Under the divestiture model, the government transfers the water busi-ness, including the infrastructure, to the private company on a permanentbasis through the sale of some or all of the shares in the company. Thismodel has only been adopted in a small number of cases, such as Englandand Wales (full divestiture) and Chile (partial divestiture).(7) In England,privatized water companies are run under strict commercial rules withtight regulation.

In addition to the above models, further options of private sectorparticipation include joint ventures and cooperatives. A joint venture isan arrangement whereby a private company forms a company with thepublic sector, with the participation of private investors, which then takes

a contract for utility management. Cooperatives are set up as limitedcompanies, and domestic customers are members who elect the adminis-trative board, although these are more common in villages and towns.

II. THE EMERGENCE OF PRIVATE SECTORPARTICIPATION IN THE WATER SECTOR

DURING THE NINETEENTH century, water and sanitation emerged as amajor public issue in the industrializing cities of Europe and NorthAmerica. The first water and sanitation services were, in fact, provided bythe private sector, but restricted to the wealthier social groups who wereable and willing to pay for them. Although private participation was alsowidely debated in the nineteenth century, and the free market viewpointwas prevalent in many of the countries undergoing sanitary reform,

6. Variations include:BuildOwnOperate(BOO),BuildOwnOperateTrain(BOOT) andBuildOwnTrainTransfer(BOTT).

7. The water utility in Waleshas since changed status toa non-profit corporation.


WATER PRIVATIZATION



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governments became convinced that good water and sanitation wereimportant for both public health and national economic development. Forthese and other reasons, governments increasingly assumed the task ofinstalling and managing piped water and water-borne sewerage systems,with the goal of universal provision.

During the twentieth century, these efforts were institutionalized in

countries and cities around the world, and water and sewerage networkscame to be managed almost exclusively by the public sector. However,provision in Africa, Asia and Latin America lagged significantly behindprogress in the North. The 1980s were designated the International Drink-ing Water and Sanitation Decade, in an attempt to prioritize and acceler-ate provision throughout the South. By the end of the decade, while thetargets set were still far from met, a new consensus appeared to be emerg-ing among a number of international actors within the water sector that,despite the experiences of the previous century, private sector participa-tion in water and sanitation could address deficiencies in water and sani-tation in the South.

The move back towards private provision can be explained as a resultof the shift away from statist and towards neoliberal (free market) poli-cies in the North from the late 1970s. While statist ideology holds thatsocietys needs and problems are best addressed by the state through thepolitical process, the neoliberal doctrine believes that social functions andeconomic development should be undertaken by business within freemarkets, with the state playing a facilitating and regulatory role withoutdirect engagement. The neoliberal agenda was simultaneously adoptedby the North-dominated international financial institutions (primarily theWorld Bank Group and the International Monetary Fund) which, usingtheir leverage as creditors, aggressively promoted neoliberal reforms to

governments of indebted low- and middle-income countries, oftenthrough structural adjustment policies that advocated the reduction ofstate spending and avoidance of substantial state investment.(8)

Neoliberal ideas had a profound influence on international develop-ment and policy debates in the water sector in the 1990s. The 1992 DublinPrinciples illustrate this new perspective and apply four developmentdicta of the 1990s to the water sector: care for the environment, increasedparticipation of non-governmental stakeholders, sensitivity to genderissues, and the increased role of markets. The last of these is embodied inthe fourth principle:

Water has an economic value in all its competing uses and should be recog-

nized as an economic good. Within this principle, it is vital to recognize first thebasic right of all human beings to have access to clean water and sanitation at anaffordable price. Past failure to recognize the economic value of water has led towasteful and environmentally damaging uses of the resource. Managing water asan economic good is an important way of achieving efficient and equitable use,and of encouraging conservation and protection of water resources.(9)

In the wake of Dublin, many international organizations realigned theirposition in the water sector, and the World Bank came to play a centralrole in developing and promoting new approaches consistent with itsinterpretation of the Dublin Principles, in particular the treatment of wateras an economic good. International financial institutions packagedreforms in the water sector with wider neoliberal policies, often throughstructural adjustment programmes. Bilateral development agencies alsostarted to promote private sector participation in their recipient countries,including the United Kingdom Department for International Develop-

8. Gutierrez, Eric (2001),Framework document: asurvey of the theoreticalissues on private sectorparticipation in water andsanitation, WaterAid andTearfund.

9. WMO (1992),InternationalConference on Water and theEnvironment: Development

Issues for the 21st Century:The Dublin Statement andReport of the Conference,World MeteorologicalOrganization, Geneva.


WATER PRIVATIZATION



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ment (DFID) and the United States Agency for International Development(USAID).(10) The conditions attached to multilateral development financeand the stances taken by bilateral agencies are inevitably perceived bysome as a means of pursuing the interests of donor countries own privatesectors rather than those of the recipients.(11) The way was thus opened forprivate sector participation in water utilities in cities in Latin America,

Asia and Africa, making privatization a central concern of developmentpolicy during the 1990s.

At the Millennium Summit in September 2000, the states of the UnitedNations agreed on a set of Millennium Development Goals. One of thespecific targets identified was to halve the proportion of people withoutsustainable access to safe drinking water by 2015. At the World Summit onSustainable Development in 2002, another relevant target was set, namely,halving the proportion of people without access to basic sanitation by2015.(12)

III. PUBLIC VERSUS PRIVATE PROVISION:CONTINUING DEBATES

IN DEBATING WHETHER water and sanitation should be provided by thepublic sector, the private sector or through collaborative arrangements,numerous attempts have been made to argue that, given the innate char-acteristics of water and sanitation systems, one or the other form of provi-sion is inherently superior. However, dwelling on the publicprivatedichotomy can divert attention from the important roles often played bycivil society organizations, and lumps together very diverse actors andagencies in both the private sector (e.g. informal vendors and multinational

corporations) and the public sector (e.g. public utilities, regulators, localauthorities and national ministries).

In practice, shifting international opinions regarding the appropriateroles of the public and private sectors in water and sanitation provisionrespond to broad political trends far more closely than they respond toevidence emerging from experiences in the water and sanitation sector.This is unfortunate. Politically driven shifts in international opinion are apoor basis for addressing local water and sanitation problems. Neverthe-less, the conceptual debates have thrown up a number of interestingissues. While they may not have come up with any clear guidance on themost appropriate roles for the public and private sectors, they have iden-

tified concerns that need to be addressed if water and sanitation provi-sion is to be improved. The arguments mobilized for public sectorprovision (public goods, natural monopolies, human rights) and forprivate sector provision (economic goods, state failure) are presented anddiscussed below.

a. Public goods

A public good is defined as something that is:non-rivalrous i.e. one persons use does not deprive others from using

it;non-excludable i.e. if one person consumes, it is impossible to restrict

others from consuming; andnon-rejectable i.e. individuals cannot abstain from consumption even if

they wish to.(13)


WATER PRIVATIZATION

10. See, for example, DFID(c1999), Better waterservices in developingcountries, safeguarding theinterests of the poor:publicprivate partnership the way ahead,Department for

International Development,London.

11. Schulpen, Lau and PeterGibbon (2002), Privatesector development:policies, practices andproblems, WorldDevelopment Vol 30, No 1,pages 115; also seereference 8.

12. UNDP (2000), TheMillennium Development

Goals: Progress, Reversals andChallenges, United NationsDevelopment Programme,New York. The UnitedNations World Summit onSustainable Developmentwas held in Johannesburg,South Africa, 26 August 4 September 2002.

13. Bannock, Graham, R EBaxter and Evan Davis(1987), The PenguinDictionary of Economics,Penguin Books, New York.



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competitors and become a monopolist. For some networked services, suchas telecommunications, attempts have been made to unbundle thesystem and develop a regulatory system that promotes competition wherefeasible. For water and sewerage networks, however, unbundling hasproved difficult, and competition is generally restricted to competitionfor the market rather than competition within the market.

The extent to which urban water and sanitation provision are naturalmonopolies should not be exaggerated, since even limited competitionwithin an urban area can be an important means of preventing the abuseof monopoly powers. In particular, purposeful measures designed tocreate exclusive monopolies should not be confused with the existence ofa natural monopoly. With a true natural monopoly, concession contractswould not have to grant exclusivity to the concession holder; it wouldemerge naturally. As early as the mid-nineteenth century, an alterna-tive means of avoiding monopoly pricing, at least in principle, has beento have private operators competing for the right to supply a given marketfor a specified period and to award this right to the firm offering to sell

this water at the lowest price.(14) As this example indicates, while naturalmonopolies are an issue, public ownership and operation is by no meansthe only response.

Moreover, while private monopolies raise a number of regulatoryissues, so do public sector monopolies. Efficient and equitable regulationmay involve different challenges when there is more private sector partic-ipation, but regulatory aspects merge with governance issues and are crit-ical, however the urban water and sanitation system is managed.

c. Human rights

The privatization of water has generated much controversy, due to itsquality as an essential human need. In such arguments, water and sanita-tion are often defined as goods to which people have a right, regardless ofability to pay.(15) The right of access to clean water and sanitation at anaffordable price is acknowledged in the Dublin Principles, as well as in anumber of other international statements in the water sector.

In international legislation, surprisingly, until recently the right towater was only specifically articulated in the Convention on the Rights ofthe Child. However, in 2002, the United Nations Committee on Economic,Cultural and Social Rights issued a General Comment declaring thatwater is not merely an economic commodity, and that access to water is a

human right: The human right to water entitles everyone to sufficient, afford-able, physically accessible, safe and acceptable water for personal and domesticuses. (16)

Countries that have ratified the United Nations International Covenanton Economic, Social and Cultural Rights are now required to take thenecessary steps towards the progressive achievement of the right of everyone toan adequate standard of living, including access to water and sanitation.

Recognition that adequate water and sanitation are human rights doesnot in itself imply that the public sector must be the provider of these serv-ices and, indeed, the General Comment does not rule out a role for privateenterprises. However, the final version of the statement, arising from adebate between representatives from public sector, private sector andindependent institutions, omitted opinions on privatization because themembers of the Committee agreed not to politicize the issue, althoughit is reported that they were unable to agree because some human rights


WATER PRIVATIZATION

14. Chadwick, Edwin(1859), Results of differentprinciples of legislation andadministration in Europe; of

competition for the field, ascompared with competitionwithin the field of service,

Journal of the Royal StatisticalSociety of London Issue 22.

15. Rogers, Peter, RameshBhatia and Annette Huber(c1998), Water as a socialand economic good: how toput the principle intopractice, TechnicalAdvisory CommitteeBackground Paper No 2,Global Water Partnership,Stockholm.

16. United NationsEconomic and SocialCouncil (2002), Substantiveissues arising in theimplementation of theinternational covenant oneconomic, social andcultural rights, draft,General Comment No 15,Committee on Economic,Cultural and Social Rights,Geneva, 1129 November2002.



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representatives were strongly opposed to privatization.(17)

The view that human rights are violated by privatization is often basedon the assumption that privatization is accompanied by full cost-recov-ery through user fees, an interpretation that is consistent with the empha-sis given to cost-recovery in many attempts to promote private sectorparticipation, even if it does not coincide with the sort of subsidized priva-

tization many private operators would favour. More generally, privatesector operation of water and sanitation services on a profit-making basisis probably the most controversial and sensitive issue in the privatizationdebate. Many people find it ethically unacceptable for tariffs to beadjusted to cover the profits of private operators when, for part of thepopulation, this interferes with their capacity to meet basic needs. Objec-tions are heightened when the profits accrue to multinational corpora-tions based in the wealthiest countries, while the prices are paid by peopleliving in poor countries.(18)

In effect, however, the key issues centre on how privatization is imple-mented, to what extent, and in what context. There is no inherent concep-

tual contradiction between private sector participation and theachievement of human rights, but contradictions will arise in particularcircumstances. Only a critical examination of private sector participationcan determine whether private sector participation is advancing orhindering the realization of a states obligations to the achievement ofhuman rights. Since human rights have an international dimension, atleast some of these obligations extend beyond the boundaries of the coun-tries where there is inadequate access to water and sanitation to, forexample, donors that are promoting private sector participation in recip-ient countries.

d. Economic goods

The Dublin Principles reinforced the re-conceptualization of water as aneconomic good, which can be loosely defined as a good that cancommand a price in a market.(19) Considering water as an economic good tobe managed by market forces is deemed to bring efficiency and highestvalue use. When the public sector provides scarce consumables for free (orat subsidized prices), people have an incentive to overuse them. However,the goods that most economists argue are efficiently supplied by privateenterprises operating in a competitive market are not just scarce: their fullcosts of production are borne by the producer, and their full benefits accrue

to the purchaser. Economics suggests that such goods should generally bepriced at their marginal cost: the cost of providing an additional unit ofthe good, taking into account the opportunity cost of not providing it toanother purchaser. This is also the price that economic theory indicates willresult given a free and competitive market.

The claim that water is an economic good has been used to justify a shiftfrom treating water as a public service to a good for which users shouldpay.(20) This argument is often extended to support full cost-recovery ofwater and sanitation infrastructure and services from users, on the groundsthat only then will provision be economically sustainable. Cost-recovery isdeemed preferable on an individual basis; that is, households should paythe full costs of their water and sanitation provision (i.e. installation,consumption, and operation and maintenance). Subsidies either from thestate or through cross-subsidies between different types of consumer areopposed because they distort the true cost of service provision.(21)


WATER PRIVATIZATION

17. Capdevila, Gustavo(2002), UN consecrateswater as public good,human right, Inter-PressService, 27 November.

18. Bond, Patrick (1997),Privatization, participationand protest in therestructuring of municipalservices: grounds foropposing World Bankpromotion ofpublicprivatepartnerships, originallypresented at the WorldBank/NGO Dialogue on

Privatization, WashingtonDC, reproduced forThe Water Page,www.thewaterpage.com

19. See reference 13.

20. Bakker, Karen (2003),From archipelago tonetwork: urbanization andwater privatization in theSouth, Geographical Journal(forthcoming).

21. Brocklehurst, Clarissa(editor) (2002), New Designs

for Water and Sanitation

Transactions: Making PrivateSector Participation Work forthe Poor, PPIAF and Waterand Sanitation Programme,Washington DC.



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Politically, however, this can be contentious, as many low-income usersare unlikely to be able or willing to pay the full costs. Moreover, urbanwater and sanitation services are not ideal goods for private provision.Water is clearly prone to overuse. But the economics of water and sanita-tion pricing are by no means straightforward. Even for water, the righteconomic price is hard to define, estimate and charge, and requires meters,

which are expensive and difficult to maintain if water pressure fluctuates.Moreover, as indicated earlier, cost-based pricing ignores the public bene-fits of water, sanitation and drainage.

In debating the appropriate role of the private and public sectors, recog-nizing water as an economic good can seem to support a strong privatesector role. This is not strictly correct, and depends on how the termeconomic good which is not widely used in economics is interpreted.If economic goods are taken to mean the sort of goods idealized ineconomic theories of perfect markets, then the case for private provision ofeconomic goods is strong. But urban water services are not economic goodsin this sense any more than they are pure public goods (and in any case,

water utilities rarely operate in a competitive market). Alternatively, ifeconomic goods are simply taken to be goods that have an economic value,and to which economic principles apply, then this would also apply topublic goods, and is largely irrelevant to the case for private provisioning.

In short, while economic issues are central to defining appropriate rolesfor the public and private sectors, these issues are merely confused bysemantic debates over whether or not water is an economic good. Histor-ically, many public water utilities have undoubtedly been under pressureto keep water prices low, even when this is leading to excessive water useamong connected households (and, in some cases, removing a potentiallyimportant source of finance for expanding the water network to uncon-

nected households). Commercial pressures can undoubtedly play a posi-tive role in driving efficiency improvements. However, privately runutilities also respond to political pressures, and may have little incentiveto improve efficiency (it depends on the nature of their contract and howit is regulated). Water provision raises a number of economic and gover-nance issues that cannot simply be resolved by bringing in private oper-ators, any more than they were resolved in the past by bringing in publicoperators.

Given the debate about whether or not water is an economic good andthe case for private provision, one might expect the same arguments tobe applied to sanitation. However, in the policy arena, sanitation is still

often regarded as a service that is unsuitable for private provision:Sanitation is often a municipal function, and reforming service delivery is

linked to a wider process of municipal reform [] many governments decide toomit sanitation from private sector transactions because they feel the sub-sectoris not suitable for such a reform.(22)

This presumably reflects the fact that while the private benefits fromwater are usually sufficient to create a considerable demand for water, thesame cannot be said of sanitation. Users are less willing to pay for safesanitation, yet its provision is highly desirable from a public healthperspective.

Various attempts have been made to label as least some parts or typesof sanitary facilities private, based on whether users can generally beexpected to pay for safe facilities. On the one hand, in the case of on-plotsanitation, households are expected to pay for the infrastructure, althoughtheir acquisition of sanitation facilities confers benefits on wider society.(23)


WATER PRIVATIZATION

22. See reference 21, citationfrom page vi.

23. Cairncross, Sandy (nodate), Why promotesanitation?, WELL BriefingNote, London School ofHygiene and Tropical

Medicine. On-plot refersto non-networkedsanitation such as latrines,septic tanks, cesspits andaqua privies.



12/29

On the other hand, as noted above, sewerage networks are often treatedas a public service that requires subsidization, even though they mayprovide some private benefits. This distinction is reinforced by an orga-nizational difference: while it is comparatively difficult to organizecentralized payments for and quality control of on-plot sanitation, this iscomparatively easy for sewerage networks.

As indicated above, whether sanitation approximates a public or aneconomic good does not really determine the appropriate roles for theprivate and public sector. In practice, a wide range of interrelated factorscome into play, including the public awareness of the benefits of goodsanitation, the existence and acceptance of sanitary laws, the ability andwillingness of different resident groups to pay for sanitation, the politicalpower of those adversely affected by poor sanitation, the quality of localgovernance, the state of public finance, and the interests of private oper-ators. Nevertheless, the evidence of public benefits is one reason why theprovision of sanitation more often stays in public hands.

e. State failure

The argument for private provision is also often linked to a broader claimthat private enterprises are more efficient than public enterprises. In partic-ular during the early 1990s, when privately run utilities were rare in low-and middle-income countries, it was simply assumed that the private sectorwould be more efficient, due to the commercial incentives that wouldencourage private operators to seek the highest possible efficiency in orderto maximize commercial returns and reduce possible losses from ineffi-ciency and non-paying customers.(24) Proponents of this view claim that effi-ciency gains will benefit all service users and, in particular, the poor, who

will be connected to the system as paying customers. However, this argu-ment ignores the fact that not all private operators make profits from beingefficient (e.g. they may be able to justify tariff increases on the basis of theirinefficiencies, especially if the regulator is poorly informed), while somepublicly operated utilities do face commercial incentives.

Furthermore, the position favouring private provision is alsosupported by the more specific observation that public water and sanita-tion utilities have failed to supply services of adequate quality and cover-age: Publicly run utilities in developing countries have been singularlyunsuccessful in providing reliable water supply and sanitation.(25)

On the one hand, this failure is often attributed to a lack of government

capacity which, when applied to utilities, leads to a downward spiral ofweak performance and low payment levels for poor services. Despitelarge amounts of international aid and multilateral loans since the 1950s,public authorities concentrated on central urban areas, leaving periph-eries and rural areas unserved.(26) It is also argued that government-runutilities are often subject to political interference and/or corruption,especially at the local level.

On the other hand, the precarious state of public water and sewerageutilities is partly attributed to the public sectors lack of funds and accessto finance, which are necessary to carry out improvement and expansionof services. In many low- and middle-income countries, public sectorshave been affected by indebtedness and other financial problems, at leastsince the 1980s. The public sector, especially local and municipal levelgovernment, often does not have access to sources of commercial finance,as it lacks such requisites as assets and creditworthiness.(27) Over and


WATER PRIVATIZATION

24. Bakker, Karen (2003), Apolitical ecology of waterprivatization, Studies inPolitical Economy Issue 70,

Spring, pages 3558.

25. See reference 21, citationfrom page 8.

26. Winpenny, James (2003),Financing Water for All:Report of the World Panel on

Financing WaterInfrastructure, World WaterCouncil, Third World WaterForum and Global WaterPartnership, Marseille,France.

27. Haarmeyer, David andAshoka Mody (1998),Financing water andsanitation projects theunique risks, Private SectorViewpoint Note No 151,PPIAF, World Bank,Washington DC.



13/29

above any inherent inefficiencies, so the argument goes, public sectorfinancial crises result in badly managed public utilities.

The limited contribution that development assistance can make in thewater and sanitation sector in the South is used as further justification forinvolving the private sector. The former UK Minister for InternationalDevelopment emphasized that available development assistance is nowhere

near enough to meet the amount needed to improve water and sanitationprovision in the South, and stressed that the gap in necessary finance couldonly be filled by the private sector.(28) Unfortunately, the fact that public anddevelopment assistance resources will not finance the needed improvementsdoes not imply that private finance will. Moreover, when privatization takesplace under extreme financial pressures, this is not conducive to well-conceived and consultative processes of privatization.

All these factors are claimed to affect low-income groups most nega-tively, as it is always these groups that remain unserved. When low-income groups lack adequate water and sanitation provision, they oftenpurchase water from informal vendors, paying per unit prices that are up

to 100 times higher than piped water from the utility.(29) Some argue thatthis shows that the ability of the poor to pay is often underestimated, andthat they would be able and willing to pay prices charged by the privatesector for a much higher quality service.(30) In this account, the currentlyhigh levels of non-payment for existing public service provision by low-income groups are associated with the fact that the services are poor ratherthan that the prices are high. A number of willingness-to-pay studies leadto similar conclusions.(31) In this debate, three points are worth noting.First, although the poor do pay high prices for water in some cases, thesehigh prices are often either for small quantities that are only used fordrinking, or only apply for short periods when water is particularly

scarce. Second, many informal water and sanitation entrepreneursprovide a fairly efficient and reliable service in difficult circumstances.(32)

Third, high water payments can put pressure on already very lowincomes, which does not imply that households are not suffering as aresult.

IV. THE SCALE AND NATURE OF PRIVATESECTOR PARTICIPATION IN THE WATER SECTORIN THE SOUTH

DESPITE PREDICTIONS FROM some within the international develop-ment sector, private sector provision has achieved neither the scale nor thebenefits anticipated. The amounts of private finance predicted have notbeen mobilized and, moreover, recent trends suggest that the rate of priva-tization is slowing in the South. This section reviews issues and trendswithin the water sector in Africa, Asia and Latin America, including provi-sion to low-income groups.

a. Engaging the private sector

Once a government has made the decision to privatize, it instructs its teamof legal, financial and technical consultants to develop the bid documents,prescribing how potential bidders should present their offers. Most contractsare now tendered through competitive bidding, in order to promote trans-parency. The bid documents need to be delicately balanced in order to satisfy


WATER PRIVATIZATION

28. Short, Clare (2000),Keynote Address, presentedat Infrastructure forDevelopment: PrivateSolutions and the Poor,London, 31 May2 June.

29. See, for example,Collignon, Bernard andMarc Vzina (2000),Independent water andsanitation providers inAfrican cities: full report ofa ten-country study, Water

and Sanitation Programme,Washington DC.

30. Gleick, Peter, GaryWolff, Elizabeth Chaleckiand Rachel Reyes (2002),The New Economy of Water:the Risks and Benefits ofGlobalization andPrivatization of Fresh Water,Pacific Institute, Oakland,California.

31. See, for example,Serageldin, Ismail (1994),Water Supply, Sanitation andEnvironmental Sustainability:The Financing Challenge,World Bank, WashingtonDC.

32. See, for example,reference 3, Solo (1999).

http://eau.sagepub.com/http://eau.sagepub.com/http://eau.sagepub.com/


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the needs of both the government and the users and present an attractiveopportunity to the bidder. Due to time constraints, the bid documentsusually focus on the core technical, financial and legal issues, with issuesspecifically related to provision in deprived areas treated secondarily, if at all.Interested private companies fulfilling the required criteria are shortlistedand invited to bid for the contract. The pre-qualifying operators teams start

doing their own assessments of the utility and the local context. If theydecide to proceed, they submit bids based on models and estimations of thecurrent situation and expected targets. In line with the bid documents, bidsrarely focus on improving services in low-income areas.

Once the private operator is in place, it carries out more detailed assess-ments of the infrastructure, and may well find that it had underestimatedthe quality and/or coverage. In such cases, they start to renegotiate rele-vant terms of the contract. However, companies may also submit bidswith a view towards underbidding the competition, even if the financialviability of the bid is doubtful a practice known as dive-bidding.Given the substantial costs to the private company of preparing a bid (US$

35 million for a large concession), this is an attractive strategy as long asrenegotiation is possible at an early stage. This may have been the case inthe two concessions in Manila (the Philippines). Manila Water won a bidfor East Manila with a tariff roughly half that of the nearest competitor,namely, 26 per cent of existing tariffs as opposed to a 57 per cent bid byMaynilad Water Services, which won the contract for West Manila.(33)

Manila Waters tariff should have been flagged by the governmentsconsultants (hired from international institutions, including the Interna-tional Finance Corporation) as unfeasible, and rejected on that basis. Asthings transpired, once in operation, neither company was able to providethe service for the tariff level it had quoted. Both set out to renegotiate at

an early stage with the regulator and, despite initial resistance, tariffincreases were approved, implying that the costs of dive-bidding wereultimately passed on to users.

Instead, with several companies now employing this strategy, somehave started to collaborate on projects rather than compete. They do thisby agreeing to submit a joint bid for a project, dividing the functionsbetween them (according to expertise and ability), and bidding for thenext contract in the same way. Companies are thus content to settle for anacceptable percentage of a project in the knowledge that they will alsogain a similar share of the next contract.(34) These are all sound financialstrategies, but undermine the purpose of competitive bidding and are not

necessarily in the best interests of customers.Such strategies are far more likely to arise when the bidding process is

poorly organized, that is, when the privatization process is being rushed,the government is unfamiliar with the sorts of contracts being negotiated,the public utility is poorly run, the companies are unfamiliar with localconditions, and local governance is weak in short, the sort of conditionslikely to hold where water and sanitation services are in greatest need ofimprovement. The difficulties involved in orchestrating a competitivebidding process also tend to overlook the need for consultation with localstakeholders and the inclusion of mechanisms to promote the interests ofdeprived groups.

b. Mobilizing finance and investment

Finance is usually the paramount consideration driving governments to


WATER PRIVATIZATION

33. Esguerra, Jude (2002),The corporate muddle ofManilas water concessions:how the worlds biggestand most successfulprivatization turned into afailure, WaterAid andTearfund.

34. Johnstone, David (2002),personal communication,Oxford, 5 September.



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involve the private sector, even when undertaken by pro-private sectorgovernments. The levels of annual investment needed for financing newwater and sanitation infrastructure alone in low- and middle-income coun-tries between 2002 and 2025 have been estimated at over US$ 13 billion fordrinking water supply, US$ 17 billion for sanitation and US$ 70 billion forwastewater treatment.(35) The contribution from international development

finance represents just a fraction of the needed resources. Between 1996 and2001, the flows of international aid and multilateral development finance tothe water sector in low- and middle-income countries were US$ 3.3 billionand US$ 1.85 billion per year, respectively. Moreover, only a small share ofthese resources (about US$ 125 million) are allocated to countries withsevere deficiencies in water and sanitation, and both sources have shown ageneral decline since the mid-1990s.(36)

It is clear, therefore, that there is a huge gap in needed investments.Despite the expectations of some that the gap in funding will be filled byforeign private finance, it is difficult to see how this can meet the requiredinvestments. The notion that the private sector will provide extensive

financing was refuted by the Chief Executive of Saur:[The false] belief that any business must be good business and that the private

sector has unlimited funds [] The scale of the need far outreaches the financialand risk taking capacities of the private sector.(37)

Moreover, the level of private finance has been disappointing, even inprojects involving private sector participation. The lack of private interestin investing in the water and sanitation sector in the South is reflected inthe extent of privatization both in relation to other utility sectors andwithin the water sector itself. Private sector participation is concentratedin energy and telecommunications, while the water and sanitation sectorhas experienced comparatively little privatization, especially in lower-

income countries.(38) The water sector has been the least attractive toprivate investment, and the sums invested have been the smallest (repre-senting only 5.4 per cent of all private commitments to infrastructureduring the 1990s).(39)

In the water and sanitation sector in low- and middle-income coun-tries, international private investment and commercial bank lending havenever been large and have also generally declined since their peakbetween 1996 and 1997. (40) Table 2 shows the pattern of investment inwater and sanitation infrastructure projects with private participation.(41)

The investment figures in this and subsequent tables are not based onprivate investment (or private finance) alone, and should not be inter-

preted as additional to the investment that would have occurred in theabsence of private sector participation. Indeed, given the importance oftenaccorded to using private sector participation to attract private finance, itis surprisingly difficult to obtain statistics that distinguish between differ-ent sources of finance.(42)

The majority of finance for investment in water and sewerage servicesin the cities of low- and middle-income countries therefore continues tocome from the public sector (through local and national tax revenue),international development assistance (through grants and loans under-taken by governments) and users (through users own outlays and waterbills).(43)

User charges (through both consumption and/or connection charges)are the principal source of investment finance in some concessioncontracts, such as Aguas Argentinas in Buenos Aires. Such measures havebeen criticized because the costs of borrowing and/or investment are


WATER PRIVATIZATION

35. Adapted from GWP(2000), Towards watersecurity: a framework foraction, Global WaterPartnership; also Briscoe,

John (1999) The financingof hydropower, irrigationand water supplyinfrastructure in developingcountries,International

Journal of Water ResourcesDevelopment Vol 15, No 4,pages 459491. Figuresinclude 15 per centallowance for operation andmaintenance.

36. International aid refers tosoft loans or grants frommultilateral and bilateraldevelopment agencies and isusually restricted to smaller

projects up to US$ 10,000.Multilateral developmentfinance refers to loans onnear-market terms forlarger-scale projects from theWorld Bank, Inter-AmericanDevelopment Bank andAsian Development Bank(calculated from data inWinpenny (2003), seereference 26.

37. Talbot, Jean-Franois(2002), Is the water

business really a business?,World Bank Water andSanitation Lecture Series, 13February 2002.

38. Houskamp, Melissa andNicola Tynan (2000),Private infrastructure: arethe trends in low-incomecountries different?, PrivateSector Viewpoint Note No216, PPIAF, World Bank,Washington DC.



41. Note that a number offigures are available thatpurport to represent theamount of foreign privatefinance in the water sector indeveloping countries, manyof which are drawn from theWorld Bank PrivateParticipation inInfrastructure (PPI)

database. However, suchfigures are often veryinconsistent. Furthermore, anumber of World Bankpublications andrepresentatives have stated



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tation infrastructure and services. Privatization accelerated sharply in 1990and peaked in 1997, after which it started to decline.(47) Following the Asianfinancial crisis, and crises in some Latin American economies, investorshave been less confident about investing in these regions and the South ingeneral.(48) In the water sector specifically, lenders and operators alike haverealized that the water and sewerage sector is both more complex and lessprofitable than originally anticipated. Experiences of failed contracts,although generally viewed as isolated events, have also made investors andwater companies more cautious. There are also fewer projects available that

are bankable. Many of the most attractive locations were either privatizedduring the 1990s or show few signs of preparing to privatize. While thereare still many viable locations, especially for concessions, the early expec-tations of continuous rapid growth in private sector participation are beingrevised downwards.

The private sector has its own criteria regarding what it considers tobe viable commercial opportunities, and these criteria have little to dowith water and sanitation targets as defined in the international devel-opment community. Companies strategies must be consistent with thedemands of their funders and market conditions. The most importantaspect for private companies and their financial partners is the potential

profit or rate of return. A key consideration is scale. Bankers and multi-national water companies are looking for large-scale projects, withcontract values of US$ 100 million upwards, in middle- to higher-incomecities with at least 1 million inhabitants (for comparison, the usual waterproject size is between US$ 1050 million).(49) Ideally, these will be invest-ment contracts (i.e. BOT-type or concession contracts), as these providethe highest returns. Smaller urban centres are unlikely to be attractiveunless they are high-income areas, or if they can be bundled with otherlocations or simultaneously served with a number of utility services.Projects must also have acceptable levels of financial and political risk,and the attractiveness of the opportunity will also depend on location-specific factors, including the extent and state of existing infrastructure.

The selection of attractive locations by private operators is termedcherry-picking, and occurs at all scales: regions (those with large orgrowing economies), countries (those with larger economies and popula-


WATER PRIVATIZATION

47. Silva, Gisele, NicolaTynan and Yesim Yilmaz(1998), Privateparticipation in the waterand sanitation sector recent trends, PrivateSector Viewpoint Note No147, PPIAF, World Bank,Washington DC.

48. Izaguirre, Ada Karinaand Geetha Rao (2000),Private infrastructure:private activity fell by 30per cent in 1999, PrivateSector Viewpoint Note No215, PPIAF, World Bank,Washington DC.


Table 3: Private water and sewerage projects in low- and middle-income

regions, 19902001*

Region Number of countries Number of Investment Investment (%)with private projects (2001 US$ billions)participation

East Asia and Pacific 7 51 15.3 38Europe and Central Asia 12 37 3.3 8

Latin America & Caribbean 15 100 20.7 52

Middle East & North Africa 3 4 0.1 0

South Asia 1 1 0.2 1

Sub-Saharan Africa 5 10 0.2 1

* These figures come from the World Bank Private Participation in Infrastructure (PPI) database. Investment refers to total investment, notprivate investment alone. Also, many small projects are omitted.

SOURCE: PPIAF (2003), Private Participation in Infrastructure: Trends in Developing Countries 19902001, Private Participation in

Infrastructure Advisory Facility, World Bank, Washington DC.



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tions), cities (those with larger, denser and wealthier populations), andneighbourhoods (those which are more affluent and preferably alreadyconnected to utilities). This is not to say that companies will not engage

in poorer countries, cities or neighbourhoods; they will do so, at a priceand under conditions that justify the risks. Cherry-picking is reflectedin the strong regional and national concentrations of private sector partic-ipation in the water and sewerage sector, as shown in Table 3. Among low-and middle-income countries, the largest number of projects and thegreatest proportion of investments are concentrated in Latin America andEast Asia.

In the period 1990 to 1997, seven countries within Latin America andEast Asia Argentina, the Philippines, Malaysia, Chile, Brazil, Mexico andChina dominated in terms of total investment and number of projects(Table 4). Generally speaking, the countries in which investment is

concentrated represent those with the largest economies and populationsand higher levels of urbanization. As outlined above, these all relate tokey attributes that make them attractive to the private sector.

There is only a weak relationship between number of projects andamount of investment, principally because many projects carry no invest-ment obligations.(50) The private sector is only required to invest in BOT-type, concession and joint venture projects, and not service, management,affermage or lease contracts. Investment trends are reflected in the choiceand distribution of different types of contract, as illustrated in Table 5.There is a predominance of concession contracts in Latin America andSoutheast Asia, several BOT-type contracts for water/wastewater treat-ment plants in India, and lease and management contracts in sub-SaharanAfrica. With the exception of South Africa, there are almost no investmentcontracts in sub-Saharan Africa. Therefore, in regions where non-invest-ment contracts dominate, virtually all investment is still coming from the


WATER PRIVATIZATION


Table 4: Investment in water and sewerage projects in

selected low- and middle-income countries,

19902001*

Number of projects Total investment(2001 US$ billions)

Argentina 2 9.6

Philippines 2 6.4

Malaysia 6a 6.1

Chile 8b 4.2

Brazil 32 3.1

Mexico 21 0.6a

China 24 0.5a

* These figures come from the World Bank Private Participation in Infrastructure (PPI) database.Investment refers to total investment, not private investment alone. Also, many small projects areomitted.

a These figures are for 1997 (1997 US$) see Silva, Gisele, Nicola Tynan and Yesim Yilmaz (1998),Private participation in the water and sanitation sector recent trends, Private Sector ViewpointNote No 147, PPIAF, World Bank, Washington DC.

b Figures from Hall, David and Emanuele Lobina (2003), Water privatization in Latin America,2002, Public Services International Research Unit, University of Greenwich, June.

SOURCE: PPIAF (2003), Private Participation in Infrastructure: Trends in Developing Countries19902001, Private Participation in Infrastructure Advisory Facility, World Bank, Washington DC.



19/29

public sector and through international development assistance.While water provision is comparatively straightforward and cost-effec-

tive, sewerage is both more complex and more expensive. User demandis also much higher for water than for sewerage. Therefore, water provi-sion is inherently more attractive to private companies than sewerageprovision, unless it is either subsidized or backed up by government regu-lations that require people to connect and pay specified fees. It is not

uncommon for water to be privatized separately from sanitation and forsanitation to remain the responsibility of the public sector, as in Crdoba(Argentina). In some cases, this is because public sewerage systems arehighly deficient, as in Jakarta (Indonesia) and Mozambique. Manymanagement and lease contracts are water-only, whereas most of the largeconcessions comprise water supply and sewerage, usually at the behest ofgovernments. A small number of sanitation-only contracts exist, as inMalaysia, but these are uncommon, unless they are BOT-type projects forwastewater/sewerage treatment plants.

In a number of cases, water and sanitation projects have been bundledto create larger projects of a scale or scope that are financially viable for the

private operator. This can involve either multiple locations or multipleutilities. For instance, in Guinea, a contract was given for the capital,Conakry, and 16 other towns and contracts have been given for a nationalscale in several African countries (Burkina Faso, Chad, Ghana, theGambia), and also Paraguay, Puerto Rico and Trinidad and Tobago. In thecase of different utilities, water has only been bundled with electricity inseveral small countries in sub-Saharan Africa (Burundi, Cape Verde,Gabon, the Gambia, Guinea Bissau, Chad and Mali), and also Morocco,but very rarely elsewhere.(51)

The water and sanitation sector, both worldwide and in the South, isdominated by a very small number of multinational water companies,namely Suez, Veolia, Thames and Saur. Together, these four companiescontrol over 80 per cent of the privatized water and sewerage market andmany water-related subsidiaries.(52) Table 6 gives data on the main multi-national companies active in the water and sewerage sector.


WATER PRIVATIZATION

51. Sommer, Dirk (2001),Multi-utilities: trends

blurring industryboundaries, Private SectorViewpoint Note No 227,PPIAF, World Bank,Washington DC.


Table 5: Contract types for water and sewerage

projects in low- and middle-income countries,

19902001*

Projects Total investment

Number % 2001 %

US$ billions

Concession 90 44 27.6 69

BOT-type 56 28 6.8 17

Management/ 41 20 n/a n/alease/affermage

Divestiture 16 8 5.6 14


SOURCE: PPIAF (2003), Private Participation in Infrastructure: Trends in Developing Countries19902001, Private Participation in Infrastructure Advisory Facility, World Bank, Washington DC.



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Local companies in low- and middle-income countries rarely have thecapacity to compete except as minority partners in international consor-tia. In some cases, the local private sector is prevented from participatingindependently, as in Kathmandu (Nepal), presumably on the grounds that

the government was seeking international finance and expertise.(53) This isa legitimate concern, as few local operators have the scale, resources andexperience to manage a significant-sized utility. Many local operators donot have strong enough balance sheets to raise debt and equity finance,and/or local bond and equity markets are often too weak to attract thescale of investment needed.(54) This is reflected in the experience of RiberoPreto, a medium-sized city in Brazil, where the local company that wonthe original bid had an annual turnover that was far too small to securethe loans it needed to execute the contract.

This level of concentration in the industry internationally is a concern.Particularly in countries where the need for improving water provision

is the greatest, national and local governments typically have far lessexperience in negotiating contracts and addressing regulatory issues thanthe companies with which they must negotiate. This imbalance makes itfar more difficult to set in place effective regulatory structures.

d. Regional extent of privatization in Africa, Asia andLatin America

Sub-Saharan Africa(55)

The cities of sub-Saharan Africa typically have very large poor urban popu-lations, most of whom rely on informal water and sanitation provision.Many cities also have small, dilapidated and underfunded public water andsewerage networks, such as Dar es Salaams water utility (DAWASA). In acontext of debt and poverty, governments lack funds for improvements.Public sectors tend to be characterized by weak institutional (and thus regu-


WATER PRIVATIZATION

53. Etherington, Alan, JamesWicken and DineshBajracharya (2002),Preparing for private sector

management of Kathmanduurban water supply,WaterAid and Tearfund.

54. Haarmeyer, David andAshoka Mody (1998),Pooling water projects tomove beyond projectfinance, Private SectorViewpoint Note No 152,PPIAF, World Bank,Washington DC.

55. Compiled from data

provided by the PublicServices InternationalResearch Unit, University ofGreenwich; also Bayliss,Kate (2002), Waterprivatization in SSA:progress, problems andpolicy implications, PublicServices InternationalResearch Unit, University ofGreenwich, December; andHall, David, Kate Baylissand Emanuele Lobina (2002),Water privatization in

Africa, Public ServicesInternational Research Unit,University of Greenwich,

June, based on PSIRU data,unless otherwise indicated.

Table 6: Dominant private operators in the water and

sewerage sector

Suez (France)a 44 18.1 10.0 115

Veolia (France)b 25 3.1 13.6 110

Thames Water (Germany) 13 3.3 2.7 37

Aguas de Barcelona (Spain) 14 10.6 n/a n/a

Saur International (France) 5 38 2.5 36

Number ofprojects

19902001*

Investment(2001 US$

billions)19902001*

Water sales(Euros

billions)2002**

Worldwidecustomers(millions)

2002**


** These figures are based on figures from company annual reports.

These figures are from 1997 see Silva, Gisele, Nicola Tynan and Yesim Yilmaz (1998), Privateparticipation in the water and sanitation sector recent trends, Private Sector Viewpoint Note No147, PPIAF, World Bank, Washington DC.

a Formerly known as Suez Lyonnaise des Eaux and Ondeo.b Formerly known as Gnrale des Eaux and Vivendi.



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latory) capacity. Most countries have been under substantial donor pres-sure to privatize, in order to access loans or debt relief. For example, theprivatization in Mozambique was connected to the WB/IMF debt relief forHeavily Indebted Poor Countries (HIPC) initiative. In Tanzania, the WorldBank has recommended improvements to DAWASA in order to attract aprivate sector operator, but is not willing to grant further financial assis-

tance until one is in place. However, without financial assistance, theTanzanian government is not in a position to provide the resources requiredto undertake the improvements that would attract a private operator.(56)

Fourteen countries have adopted some form of privatization: BurkinaFaso, Cape Verde, Central African Republic, Chad, Cte dIvoire, Gabon,Guinea, Mali, Mozambique, Niger, Republic of Congo (Brazzaville),Senegal, South Africa and Uganda; and a further number are proposingit. Most contracts were set up in the late 1990s or early 2000s. Contracts aredominated by French multinational corporations, especially Saur. Fran-cophone countries have implemented more private contracts, possiblydue to their links with France and French multinational corporations. The

precarious situations of many water utilities and public sectors in sub-Saharan African cities are reflected by the number of cases in whichcompanies and governments have been unable to reach agreements incontract negotiations, such as Nairobi (Kenya) and Gweru (Zimbabwe),and processes of privatization encountering problems, as in Mozambique,or breaking down, as in Fort Beaufort (South Africa).

Sub-Saharan African countries have in general been unable to attractcompanies that are willing to invest in the region, as it is regarded as toorisky. This is reflected by several factors. First, most contracts in the regionare short-term, non-investment management and lease contracts. Second,contracts are being drawn up in US dollars to protect companies from

local currency devaluation. Third, water utilities are commonly bundledwith electricity in order to create more attractive commercial opportuni-ties; in fact most such cases are in this region. Fourth, two multinationalcompanies, Saur and Biwater, have stated that African countries do notrepresent attractive investments due to the very poor state of water utili-ties and because most consumers cannot afford tariffs that are highenough to generate adequate returns.

South Africa has a considerably higher per capita income than mostother countries in sub-Saharan Africa, and does not reflect the sametrends. It has more private sector contracts, and most of these are conces-sions. There has also been much greater and more successful opposition

to water privatization, especially from unions and other civil societyorganizations. The government has responded with changes in policy, butit has also not taken loans from multilateral financial institutions, and hasthus not been subject to the conditions they impose.

The most noteworthy policy response was the declaration of a lifelineof free water for all South Africans in October 2000. This followed a severecholera epidemic that year in several provinces and cities, includingJohannesburg, which was the worst in South Africas history. It was linkedby many to government policies of full cost-recovery for water, and theensuing lack of access to water of sufficient quantity and quality by thepoor, including the residents of the district where cholera first appeared(who were too poor to pay the registration fee to join their local low-costwater scheme). The lifeline is deemed to reflect subsistence needs, and isset at 25 litres per person per day, and provided as 6,000 litres per house-hold per month (regardless of income). This is being enforced despite


WATER PRIVATIZATION

56. WaterAid Tanzania(2002), Water utility reformand private sectorparticipation in Dar-es-Salaam, WaterAid andTearfund.



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Latin America and the Caribbean(62)

Latin America has awarded more privatization contracts in the water andsanitation sector than any other region. Private sector contracts have beenimplemented in Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Domini-can Republic, Ecuador, Honduras, Mexico, Puerto Rico, Uruguay andVenezuela, with several contracts in Argentina, Brazil, Chile, Colombia and

Mexico. Contracts date from the early 1990s onwards. The extent of priva-tization in the region can be attributed to three main factors. First, LatinAmerica has many cities with sufficiently large populations, and sufficientlylarge middle classes, to attract private operators. Second, the indebtedness,precarious public finances and poor conditions of many public water util-ities provide the justification for change. Third, neoliberal policies have beenadopted to a greater extent than in other regions, in part because of condi-tions imposed by international financial institutions. Most large concessionsin Latin American cities have been financed at least in part by multilateralloans.

Latin America is characterized by a relatively large number of conces-

sions. The market is dominated by Suez first and then Veolia, but with theparticipation of a wider range of international companies than in otherregions. The local private sector also appears to be more consolidated thanin other regions, either within consortia with multinational companies or,less commonly, independently (e.g. Latin Aguas, Argentina). Anotherparticular feature is that the region has several innovative contractualarrangements, such as joint ventures and cooperatives. It also has somewell-run public water utilities (e.g. Porto Alegre and So Paulo, Brazil,Cali, Colombia and the cooperative in Santa Cruz, Bolivia).

Latin America has also seen a number of initiatives to improve serv-ices for low-income groups through private sector participation (e.g.

Buenos Aires, Argentina, La Paz, Bolivia, and Cartagena, Colombia). TheLa Paz concession was specifically designed to expand services to thepoor and contains a number of innovative contractual obligationsdesigned to achieve this.(63) These include contract stipulations that all newconnections must be in-house, defined quality parameters, low-cost tech-nology (e.g. condominial sewerage), training and access to microcreditfor installing connections, and a participatory approach that involvesliaison with neighbourhood organizations and sanitary education.(64)

A number of private contracts in Latin America have experienced prob-lems. Argentinas financial crisis of December 2001 had significant impli-cations for the water concessions underway in the country. In the

contracts, prices were indexed to the US dollar to protect the multinationalcompanies against local currency devaluation. However, this becameuntenable when the Argentine peso devalued by about 70 per cent, andthe situation remains unresolved.

Four large contracts in Latin America have been terminated prema-turely: Buenos Aires Province and Tucumn (Argentina), Cochabamba(Bolivia), and Trinidad and Tobago. In all cases, governments terminatedthe operators contracts due to poor performance, and service provisionhas reverted to the public sector. The most notable privatization failurewas the termination in 1999 of the concession in Cochabamba. Primarilymotivated by tariff increases of up to 200 per cent, the imposition of anexclusivity clause on water resources, and the involvement of the WorldBank and a multinational company, the situation provoked violentprotests that resulted in the termination of the contract.(65)


WATER PRIVATIZATION

62. Unless otherwiseindicated, compiled fromdata provided by the PublicServices InternationalResearch Unit, University ofGreenwich; also Hall, Davidand Emanuele Lobina(2003), Water privatizationin Latin America, 2002,Public ServicesInternational Research Unit,University of Greenwich,

June; and Hall, David(1999), Water andprivatization in LatinAmerica, 1999, PublicServices InternationalResearch Unit, University ofGreenwich, September,

based on PSIRU data.

63. Komives, Kristin andPenelope Brook Cowen(1998), Expanding waterand sanitation services to

low-income households: thecase of the La PazEl AltoConcession, Private SectorViewpoint Note No 178,World Bank, WashingtonDC. The La Paz concessionalso includes theneighbouring settlement ofEl Alto.

64. Condominial sewerageis a low-cost seweragesystem developed in Brazilthat comprises a branch

system with one sub-branchper block and individualconnections to each plot,using small diameter plasticpipes set at least 3040centimetres deep.

65. Nickson, Andrew andClaudia Vargas (2002), Thelimitations of waterregulation: the failure of theCochabamba concession inBolivia, Bulletin of Latin

American Research Vol 21,No 1, pages 99120.

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e. Private provision to low-income areas

Much attention has been paid to serving low-income groups under privatesector operation of water and sanitation services. Much policy literaturesuggests that the private sector, through external funding, greater efficiencyand customer service, will extend and improve services to low-income

groups.(66) According to this argument, unserved groups represent a largeand untapped market for the private sector, as they are willing to pay forbetter services (household connections, more reliable and better qualitysupply). Practical experiences, however, provide little evidence to supporteither of these claims. Indeed, there is little evidence either that the privatesector is interested in serving low-income groups, or that they are any betteroff under private provision.

A number of multinational water companies have asserted that low-income populations do not represent an attractive market because they aretoo poor to be profitable and represent too great a financial risk. The chiefexecutive of Saur said that there was little scope for users in the South to

be able to pay prices that represent the levels of investment needed, thatthe goal of connections for all users was unrealistic, and that publicsector subsidies and soft loans were essential for meeting these needs.(67)

Representatives of Veolia stated that profits depend on sufficient andassured revenues from the users of the service, which are unlikely toinclude poor groups.(68) Biwaters general manager, referring to Zimbabwe,also claimed that: From a social point of view these kinds of projects are viablebut, unfortunately, from a private sector point of view they are not .(69)

Indeed, attempts by the private operator to serve low-income groupshave seldom been successful from a commercial perspective. The La Pazconcession, which was designed to be pro-poor, was operating at a loss

only three years into the contract, principally due to a lack of demand fornew connections and low domestic water consumption.(70)

This represents, at base, an argument for subsidies. In practice, manyaccept that services for low-income users need to be subsidized, eitherdirectly through payments to the utility for providing the services or indi-rectly through welfare payments to the low-income users themselves.(71)

Water subsidies and cross-subsidies are commonly incorporated intowater tariff structures, through rising block tariffs (lower tariff for the firstdesignated volume), social or welfare tariffs (lower charges for low-income households, often at a flat rate), banded charges (lower tariffs forlower-income neighbourhoods) or lifeline tariffs (designated volume

provided free of charge). Less commonly, direct means-tested subsidiesare given to low-income households, as in Chile.(72) Where regulators areresponsible for pricing, they can decide how best to ensure access for low-income groups without compromising operators required returns. Wherecross-subsidies are not feasible, some alternative means of financing thesubsidies must be found.

Connection charges are also often unaffordable for low-income groups,especially if they are based on cost-recovery, in which case they are likelyto be significantly higher where networks are being extended intounplanned and peripheral settlements.(73) Connection charges also placethe cost of network expansion on unserved households, while thosewhich obtained connections before privatization usually paid nothing.Connection charges often need to be cross-subsidized with other users, asoccurred in Buenos Aires. The charges for new connections (approxi-mately US$ 400 for water and US$ 600 for sewerage) were unaffordable to


WATER PRIVATIZATION

66. See, for example,reference 21.


68. Bourbigot, Marie-Marguerite and Yves Picaud(2001), Publicprivatepartnership (PPP) formunicipal water services,Regional Conference on theReform of the Water Supplyand Sanitation Sector inAfrica, Kampala, Uganda,February.

69. Whiting, Richard (1999),quoted in Zimbabwe

Indep

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